IRS Hot Issues
Richard G. Furlong, Jr.
IRS Senior Stakeholder Liaison
Small Business/Self-Employed Division
South Jersey Working Together Conference
June 12, 2014
Stakeholder Liaison:
Issue Management Resolution System (IMRS)
•
•
Provides mechanism for raising concerns
– IRS policies, practices and procedures
– Systemic problems
Facilitates issue identification, resolution and
feedback
2
Issue Submission
•
•
Gather all information
Contact local stakeholder liaison staff
– Visit IRS.gov
– Search keyword “stakeholder liaison”
3
Elevating an Issue
•
•
•
•
Is it an IRS issue?
Is clarification needed?
Are policy or procedural changes needed?
How widespread is the issue?
4
Response and Resolution
•
•
•
•
Direct response from Stakeholder Liaison
Changes to policy and practices
Expanded education and outreach
Monthly IMRS reports on IRS.gov
5
Identified Trends
•
•
•
Authorizations and powers of attorney
Automated Underreporter program
Correspondence exam and CP notices
6
Search “IMRS” on IRS.gov
•
•
•
•
•
Hot issues
IMRS monthly overviews
Industry issues quarterly report
Prior year issues sorted by subject
Stakeholder Liaison local contacts
7
Reporting Foreign Assets
and Offshore Accounts
(FBAR and Form 8938)
Richard Furlong, Jr.
June 12, 2014
Two Reporting Regimes
1. FinCEN Form 114, Report of Foreign Bank
and Financial Accounts (FBAR)
• Title 31, § 5314
• Stand-alone report, must be electronically
filed on or before June 30
2. Form 8938, Statement of Specified Foreign
Financial Assets
• Title 26, § 6038D
• Attached to Income Tax Return
9
Professional Responsibility
§10.22 Diligence as to Accuracy (Circular 230)
• Should make reasonable inquiries when
client provides information suggesting
participation in overseas transactions/
accounts subject to FBAR and Form 8938
• Should advise client of potential penalties
associated with noncompliance of FBAR and
Form 8938 requirements
10
Additional Medicare Tax
(AdMT) - Individuals
•
•
•
•
•
Provides for 0.9% AdMT on wages, compensation and
self-employment income received above certain
threshold amounts
Threshold amounts are based on filing status
– Married Filing Jointly
$250,000
– Married Filing Separately $125,000
– All others
$200,000
Individuals may need to increase their income tax
withholding or estimated taxes for AdMT
AdMT will be computed on new Form 8959, Additional Medicare
Tax, and reported on Form 1040, line 60, box a
For more details, go to IRS.gov/aca
11
Additional Medicare Tax
(AdMT) - Employers
•
•
•
•
Employers are required to withhold 0.9%
AdMT on wages or compensation paid to an
employee in excess of $200,000 in the
calendar year, without regard to filing status
There is no employer match for AdMT
A new line 5(d) was added to Form 941
The amount withheld will be reported with
regular Medicare tax on Form W-2 Box 6
12
Net Investment Income Tax
(NIIT)
•
•
Tax of 3.8% on certain net investment income to the
extent modified AGI is above threshold:
– Married Filing Jointly
$250,000
– Married Filing Separately $125,000
– Single
$200,000
– Head of Household
$200,000
– Qualifying Widow(er)
$250,000
For estates and trusts threshold for tax year 2013 is
$11,950
13
Additional information
•
•
Form 8960, Net Investment Income Tax—
Individuals, Estates, and Trusts
IRS.gov/aca
– Find out if Net Investment Income Tax
applies to you
– Questions and Answers on the Net
Investment Income Tax
14
Independent Contractor or
Employee
Three categories of evidence:
• Behavioral control: Instruction, evaluation,
training
• Financial control: Investment, method of
payment, ability to make a profit or incur a loss,
services available to others
• Relationship of the parties: Written contract,
permanency, integral part of business
15
Independent Contractor or
Employee
Tax court considerations (“Peno Trucking”):
•Degree of control
•Investment in facilities
•Options for profit and loss
•Right to discharge
•Integral part of business
•Permanency of relationship
16
Voluntary Classification
Settlement Program
•
•
•
•
•
•
Originally released 9/21/2011
Eligibility expanded January 2013
Simple application and process
Audit protection for past years
Taxpayer agrees to:
– Prospectively treat a class or classes of
workers as employees
Small payment required – just over 1 percent of
compensation
17
VCSP Eligibility
Eligible Businesses:
• Must have consistently treated workers as
nonemployees
• Must have filed Forms 1099 for nonemployees
for previous three years
• Cannot be under examination by IRS
• Cannot be under examination by DOL or state
regarding worker classification
• Can be tax-exempt organization or gov entity
18
Business Use of Home
•
•
•
New optional simplified method
– Maximum 300 square feet
– Flat deduction of $5 per sq. ft.
Form 8829 not required
For the latest information, go to irs.gov:
Search: “Home Office FAQs”
Rev. Proc. 2013-13
19
Compliance Focus
1120S Officers’ Compensation
•
•
•
•
Zero (or very small) wages paid and significant
distributable income
Officer performs significant services
Employment taxes reduced or eliminated
Case study: Watson
20
EITC Due Diligence Requirements
Internal Revenue Code §6695(g) has four due
diligence requirements
1. Complete and submit Form 8867
2. Complete and keep all worksheets
used to compute the credit
3. Keep records
4. Apply the knowledge requirement
21
Form 8867
Paid preparers of EITC returns must:
– Submit Form 8867, Paid Preparer’s Earned Income
Credit Checklist, with every claim for EITC filed
electronically
– Attach Form 8867 to every claim for EITC presented to
your client
–
$500 penalty for not attaching or submitting Form 8867
22
Knowledge Requirement
IRS assesses most due diligence penalties for
failure to comply with the knowledge
requirement
• Apply common sense standard
• Evaluate the information—is it complete?
• Determine if the information is consistent
and recognize contradictory statements
• Don’t ignore statements you know are not
true
23
Meet the Knowledge Requirement
•
•
•
Conduct a thorough interview with each
client, every year
Ask enough questions to reasonably know
the return is correct and complete
Record questions asked and answered
during the interview
24
S-Corp Late Election Relief
Revenue Procedure 2013-30
• Contains late election relief guidance.
• Relief is only for late elections that would
otherwise be valid.
• Increases relief time frame to 3 years and 75
days of the effective date of the election.
If it doesn’t qualify for relief under the above
procedure, may request relief by requesting
a private letter ruling. (See Rev. Proc. 20131)
25
Late Election Relief Requirements
•
•
•
•
Entity intended to be classified as an S corporation, is
an eligible entity and failed to qualify as an S
corporation solely because the election was not timely;
Entity has reasonable cause for its failure to make the
election timely;
Entity and all shareholders reported their income
consistent with an S corporation election in effect for the
year the election should have been made and all
subsequent years; and
Less than 3 years and 75 days have passed since the
effective date of the election.
26
Exception to the 3 Years
and 75 Days Rule
Certain entities can qualify for the exception
to the 3 years and 75 day rule only when
certain criteria are met and neither the entity
nor any of its shareholders was notified by
the IRS of any problems regarding the S
corporation status within 6 months of the date
on which the Form 1120S for the first year
was timely filed.
27
End of Election
Once the election is made, it stays in
effect until it is terminated or revoked.
28
S-Corp Election Relief Summary
•
•
•
•
•
A qualifying entity elects S corporation status via Form 2553.
An entity that fails to timely file Form 2553, can request relief
for the late election, if it qualifies, under Rev. Proc. 2013-30.
Only the IRS Service Center has the legal authority to grant
late elections, if the requesting entity qualifies under Rev.
Proc. 2013-30.
Neither Exam nor Appeals has the legal authority to grant
late elections.
An entity, that does not qualify under Rev. Proc. 2013-30,
can request late election relief from IRS National Office by
requesting a private letter ruling.
29
Simplified Home Office
Deduction Option
•
Beginning with tax year 2013 (returns filed in
2014), taxpayers will have the option to use a
simplified method for claiming the deduction
for business use of their home.
30
Highlights of Simplified Option
•
•
•
•
Standard deduction of $5 per square foot of
home used for business (maximum of 300
square feet)
Form 8829 not required
Allowable home-related itemized deductions
claimed in full on Schedule A (for example:
mortgage interest, real estate taxes)
No home depreciation deduction or later
recapture of depreciation for the years the
simplified option is used
31
Comparison of Methods
Simplified Option
Regular Method
Deduction for home office use
of a portion of a residence
allowed only if that portion is
exclusively used on a regular
basis for business purposes
Same
Allowable square footage of
home use for business (not to
exceed 300 square feet)
Percentage of home used for
business
Standard $5 per square foot
used to determine home
business deduction
Actual expenses determined and
records maintained
32
Comparison of Methods
Simplified Option
Home-related itemized
deductions claimed in full
on Schedule A
No depreciation deduction
No recapture of
depreciation upon sale of
home
Regular Method
Home-related itemized
deductions apportioned
between Schedule A and
business schedule (Sch. C or
Sch. F)
Depreciation deduction for
portion of home used for
business
Recapture of depreciation on
gain upon sale of home
33
Comparison of Methods
Simplified Option
Regular Method
Deduction cannot exceed
gross income from business
Same
use of home less business
expenses
Amount in excess of gross
Amount in excess of gross
income limitation may not be income limitation may be carried
carried over
over
Loss carryover from use of
Loss carryover from use of
regular method in prior year may
regular method in prior year
be claimed if gross income test is
may not be claimed
met in current year
34
Identity Theft
•
•
Stopping identity theft and refund fraud is a
top priority for the IRS
Efforts expanded in 2013
– Fraud prevention
– Early detection
– Victim assistance
35
Identity Theft – Fraud Prevention
•
•
•
Increased identity theft screening filters
Increased number of identity theft
investigations
Nationwide enforcement sweeps
36
Identity Theft – Early Detection
Two identity theft programs expanded in 2013:
•
•
Taxpayer Protection Program Law
Enforcement Assistance Program
37
Identity Theft – Victim Assistance
•
•
•
Identity Protection Personal Identification
Numbers expansion
Victim case resolution
Expanded service options:
– Identity Protection Specialized Unit
(800.908.4490)
– Free credit monitoring
38
Refund Fraud Detection and
Prevention
•
•
•
•
Increased identity theft screening filters
Expanded pilot program with local law
enforcement agencies
Collaborate with financial institutions
Expanded Identity Protection Personal
Identification Number pilot
39
Criminal Investigation Enforcement
•
•
•
Increased number of identity theft
investigations
Nationwide enforcement sweeps
Expanded Law Enforcement Assistance
Program
40
Online Tools & Resources
41
Online Tools and Services
Popular online tools used by tax professionals:
• Subscription Services
• Where's My Amended Return?
• Online Payment Agreement
• Offer In Compromise Pre-Qualifier Tool
• Online Employer Identification Number (EIN)
• IRS Video Portal
• Affordable Care Act Tax Provisions
42
Online Payment Agreement
•
Simplicity and convenience
•
Fewer defaults
•
Fewer posting errors
•
Reduced cost
43
Benefits to Taxpayers
•
Fully automated
•
Interactive
•
Streamlined
44
Benefits to Taxpayer
•
No personal contact
•
Taxpayer or Rep Self-Qualifies and applies
•
Education
•
Lower costs
45
Payment Options
•
Full pay in 10-days
•
Short-term extension
•
Monthly payments
46
Can Use OPA To:
•
Revise payment due date
•
Revise payment amount
•
•
Convert short-term extension to monthly
payments
Convert regular agreement to payroll
deduction or direct debit
47
Who Can Use OPA
•
Individuals and
•
Their representatives
48
Questions/Other Info
•
•
IRS.gov key words “collection procedures”
Owe Taxes? New video series
IRSVideos.gov/OweTaxes
49
Offer in Compromise Pre-Qualifier Tool
•
Launch date: January 30, 2013
•
Self determine: Qualify for an OIC?
50
How Does It Work?
Answer a series of questions:
•
•
•
•
•
•
Currently in bankruptcy?
Current with filing?
Where do you live?
Number of dependents?
Household income and expenses?
Value of assets?
51
Qualify - Yes
Directed to:
•
Complete Form 656
•
Submit the application
52
Qualified- No
Directed to alternatives:
•
OIC Booklet -exceptional circumstances
•
Installment Agreement
•
Make a payment page
53
Automated
Underreporter (AUR)
and Correspondence
Examinations
Richard Furlong, Jr.
IRS Senior Stakeholder Liaison
Small Business/Self-Employed Division
South Jersey Working Together Conference: June 12 2014
Correspondence Reporting
Compliance Programs
•
•
Two major compliance programs within the
Campus Reporting Compliance Organization:
– Correspondence Examination
– AUR – Automated Underreporter
Similarities and the differences between AUR
and Exam
55
Similarities between AUR
and Campus Exam
•
•
Notice progression
A timely written response includes:
– Response page
– Detailed explanation for each issue with
supporting documents attached
– Contact number
– Using the envelope provided
– Sign the notice and submit payment if you
agree with the notice
56
Correspondence Examination
Inventory Selection
•
•
Original or amended returns with potentially
questionable deductions, expenses or credits
– Use data to identify returns with high potential
for a tax adjustment
• Third party information
• Potentially inconsistent line items on the
return
Referrals from our Electronic Fraud Detection
System, Criminal Investigation and preparer/
promoter actions
57
Correspondence Examination
Audit Issues
•
•
•
•
•
•
Earned Income Tax Credit
Certain non-filing conditions
Schedule A issues
– Employee business expenses
– Charitable contributions
Emerging issues and tax credits (child
care, education, adoption, etc.)
Schedule C issues
58
Correspondence Examination
Letters and Notices
•
•
•
•
Initial contact letters (CP 75 and L 566)
No examination report
– CP 75 (75, 75A, 75D) for EITC and
dependency issues
– Letter 566 – For most non-EITC issues
Letter 525 – Follow up letter including the
examination report (Form 4549)
Statutory Notice of Deficiency (Letter 3219) “90
day Letter
59
Correspondence Exam
Practitioner Concerns
•
•
•
•
Practitioner Priority Service
Streamlined mail processing
– Major assessment of Correspondence Exam
– Reviewed and analyzed external feedback
– Corrective actions based on findings
– Efforts and pilots to enhance service and
processing
Longer term strategies (e-Communication)
Additional outreach with external stakeholders
60
Automated Underreporter
•
•
•
IRS matches amounts reported on returns with
information returns submitted by third parties
This computer matching begins after original
return due date – not a real time process
When a discrepancy is identified, an AUR
case is created
61
AUR Notice Progression
•
•
•
•
Tax examiners attempt resolution of the
discrepancy prior to taxpayer contact
CP 2501 – preliminary contact
CP 2000 – proposed changes and tax
calculations
Statutory Notice of Deficiency (Letter 3219)
“90 Day” Letter
62
CP 2000 Process
•
•
•
CP 2000 notice issued
IRS waits for taxpayer response
If taxpayer disputes the CP 2000:
– Taxpayer sends in response to CP 2000 or
makes telephone contact
– IRS AUR Unit reviews taxpayer response
– Possible phone contact made
– Determination made on case
63
AUR – Helpful Hints &
Common Mistakes
•
•
•
•
•
Do not net amounts
Include a breakdown of grouped amounts
Include any corrected payer documents
Report income on the correct line
Include all back-up schedules
64
Recent AUR Developments
•
•
•
Notice clarity
Improved inventory selection
Program expansion
– Matching of business filers
– New income reporting documents
65
Compliance Programs
•
•
Key points:
– Respond to our notice
– Work with us to resolve the issues
Significant compliance programs
– Between both programs over 5 million
closures
– Over $16 billion assessed
66
Appeals Mediation Programs
Online Self-Help Tool on irs.gov
The tool is designed to explain the different
mediation programs available, and will:
• Help you know when to discuss mediation
with the IRS person assigned to your case
• Help you decide which mediation program
best fits your needs
• Provide application instructions
Visit IRS.gov and type “mediation self help” in
the search box.
67
What is Mediation?
•
•
•
•
•
•
Informal & flexible dispute resolution process
Voluntary to both parties
Nonbinding
Appropriate when all issues fully developed
Effective when both parties want resolution
A chance to avoid lengthy appeal or costly
litigation
68
Online Self-Help Tool – Screen Shot
69
Online Self-Help Tool – Eligibility
Basic program eligibility requirements:
• You want to resolve a tax dispute at the earliest
opportunity;
• Your case is still under consideration with no
letter received from IRS offering appeals rights;
• There are a limited number of disputed issues;
• You have provided IRS information to support
your position.
70
Appeals Information on IRS.gov
•
•
If this tool does not fit your needs, visit
IRS.gov’s Web page, What Can You Expect
from Appeals? to learn more about the IRS
Office of Appeals.
Type “What Can You Expect from Appeals”
into the IRS.gov search box.
71
Payroll Service Providers (PSPs)
Many employers outsource their payroll and
related tax duties, the 3rd party payers will:
• Administer payroll and employment taxes
• Provide assistance in meeting filing deadlines
and deposit requirements
• Streamline business operations
72
Types of Third Party Payers
Common third party arrangements include:
– Payroll Service Providers (PSPs)
– Reporting Agents
– Section 3504 Agents
– Professional Employer Organizations (PEOs)
Reminder: Employers are ultimately responsible for the
payment of income tax withheld (employer and
employee portions of social security and Medicare
taxes). See Fact Sheet 2013-9 Tips for Employers
Who Outsource Payroll Duties
73
Electronic Federal Tax Payment System
The EFTPS is:
• Mandatory
• Secure, accurate and easy to use
• Available to be viewed online after enrollment
• Accessible by an Inquiry PIN
The system:
• Provides immediate confirmation for each
transaction
• Maintains a history for 16 months
74
Types of Third Party Payers
Common third party arrangements include:
– Payroll Service Providers (PSPs)
– Reporting Agents
– Section 3504 Agents
– Professional Employer Organizations (PEOs)
Reminder: Employers are ultimately responsible for the
payment of income tax withheld (employer and
employee portions of social security and Medicare
taxes). See Fact Sheet 2013-9 Tips for Employers
Who Outsource Payroll Duties
75
Electronic Federal Tax Payment System
The EFTPS is:
• Mandatory
• Secure, accurate and easy to use
• Available to be viewed online after enrollment
• Accessible by an Inquiry PIN
The system:
• Provides immediate confirmation for each
transaction
• Maintains a history for 16 months
76
Employment Tax Investigations
Can result in:
– Prosecutions of individuals and companies, acting
under the guise of a third party payroll service.
For more information, visit IRS.gov and type in the
key search words “employment tax investigations.”
– Liabilities for employers who are ultimately
responsible for the payment of income tax
withheld (employer and employee portions of
social security and Medicare taxes).
77
Changes to Form 2848
Power of Attorney
•
•
•
•
•
Joint returns
Copies of notices and communications
Acts authorized
Representative designations
Future developments
78
Third-party designee “Check Box”
•
•
•
Intended to facilitate processing of tax return
Not for compliance issues or CP-2000
Expires one year after due date of return
79
Rescinding an Existing POA
Taxpayer:
• New Form 2848 without checking Box 6
• Write “REVOKE” across the top of previously
filed Form 2848 and sign
• Send statement revoking POA
Representative:
• Write “WITHDRAW” across the top of
previously filed Form 2848 and sign
• Send statement revoking POA
80
Practitioner Priority Service
®
Available to all practitioners with valid third party
authorizations; services include:
•
•
•
•
•
•
•
Locating and applying payments
Resolving taxpayer account problems
Explaining IRS communications
Providing procedural guidance
Providing transcripts of taxpayer accounts
Provide Forms 1099 and W-2 information
Securing taxpayer income verification
81
Social Security Policy Change
• After 8/1/14, SSA will not issue SSN printouts
• After 10/1/14, SSA benefit verification letters
only available online or by phone
82
Follow IRS on Twitter
@IRSnews – IRS news and guidance for the
public, the press and practitioners:
http://twitter.com/irsnews
@IRStaxpros – IRS news and guidance for
tax professionals:
http://twitter.com/irstaxpros
@IRSenEspanol – IRS en Español (IRS in
Spanish):
http://twitter.com/irsenespanol
83
Contact Information
Richard Furlong, Jr.
215-861-1551
richard.g.furlong@irs.gov
84